Friday, May 24, 2013

When I first started dividend investing, I was looking for the lowest commission possible. I ignored any other features of a stock brokerage, since I viewed the brokerage industry as one that provides a commoditized service. Back in 2008 – 2010 I was a big fan of Zecco, mostly for their free trades. Since then I have branched out to other brokers. Before I was a dividend investor, my investing was concentrated on buying mutual funds in a 401 (k).

The chart above summarizes brokers I have personally invested through since I started my site to document my dividend investing journey. In addition, the information above is not intended to be complete in any means. I have rated the brokers above based on my experience with them, with Schwab being the best, while Sogotrade having room for improvement. Sogotrade charges $5 for trades, but $3/trade if you prepay. The chart shows the commissions for each broker for stock trades, and assumes an individual investor does less than 10 trades/month. It also lists the minimum amounts an investor needs to deposit, in order to open a cash account. The next column shows whether the broker offers dividend reinvestment of partial shares. Tradeking does allow dividend reinvestment per my experience, but not for partial shares. The next to last column shows the length of time that trade history and trade statements are available to the customer. In some cases, the trade history is limited to my own experience with the broker. In other cases, this is based on information available on the broker website. The last column shows that none of the brokers had any inactivity fees at the time I wrote this article.

The story below discusses my experiences with brokers, which could be different than your experience.

I believe that brokers should offer a commission that provides value to customers and also a decent rate of return to the brokerage company itself. A low commission is typically associated with rudimentary platforms which could be very confusing to the investor. Of course, if you are an experienced investor who knows what they need and doesn’t need much hand holding, then you should do fine with simply the lowest cost broker. However, when something goes wrong, and it usually will, you will start regretting your decision.

My experience with Zecco was positive for a few years, while they were offering 10 free trades for accounts whose balance exceeded $2,500. Initially, back in 2006, Zecco offered 40 commission free trades to all customers. In 2009 Zecco changed its rules once again and only provided ten free trades to customers with account balances that exceed $25,000. In 2010, Zecco eliminated commission free trades for everyone except traders who made 25 trades/month. In the meantime, I had a few other brokerage accounts, but was considering Zecco to be my primary individual brokerage account. Then Zecco started going through platform upgrades and changed their clearing firm. In addition, Zecco never offered automatic dividend reinvestment that allowed your investments to compound. This was never an issue for me, since I like to accumulate my dividends and new funds, before I buy a security. The only problems that I had were with companies that were paying 5% stock dividends or companies like Kinder Morgan LLC (KMR) which paid distributions in fractional shares. Zecco used to provide these distributions in cash, thus creating a taxable event and negating any long-term compounding of my investments.

In the meantime, a lot of Zecco investors were unhappy with their platform, because it often crashed during periods of extreme market volatility. Back in late 2008, there were several times when I was unable to log into my Zecco account to place a trade. I was also unable to log into my Zecco account during the May 6, 2010 flash crash. I was able to log into my Schwab account however on both occasions. When Zecco upgraded platforms and changed clearing firms, this created some issues for me. Actually, this created a lot of headaches for me, because some of the shares I owned like Royal Dutch Shell (RDS/B), Brown-Forman (BF/B) and Nestle (NSRGY) were either not showing in my account, or had an incorrect symbol and the position amount was zero. It is a scary feeling to wake up and see that your equity holdings are not correct or simply not there.

A few months ago, Zecco merged with Tradeking. I was afraid that I would still have issues, but luckily this never materialized. The main issue with the merger was that I lost the ability to pull from the broker website all my historical account statements and all historical activity going back to when I first opened the account. Luckily, I keep good records, and have all of this information at my fingertips. However, it is important for long-term investors to choose a brokerage that provides you with all your account activity detail going as far back as possible. Otherwise, when you sell a stock that you have held for 20 or 30 years, figuring out your tax basis would be a nightmare. Tradeking does offer dividend reinvestment, but as I mentioned earlier, I typically reinvest dividends selectively.

As a result, I started adding all new funds to SogoTrade. I kept adding funds, until they made another change in their platform when they were purchased by Wang Investments in 2011. This change did not allow me to log in to my account for a day or two. After that, I was unable to withdraw funds easily. The process is still very cumbersome and one has to enter their account number twice, after they have logged on to the platform, in order to request an ACH transfer. In addition, changing your address is a very difficult thing to accomplish with Sogotrade. It requires you to download a form, fill it out, and then fax or email it to them. If you fax it to them, you run the risk of Sogotrade losing it, which is why it is best to email it. At $3/trade however up until early 2013, you could hardly beat them. Sogotrade does not offer fractional dividend reinvestment, but keeps all monthly statements going as far back as possible. A few weeks ago however, they raised their prices to $5/trade, although investors who pre-pay for trades could still end up paying as little as $3/trade.

For a new investor, I would consider Sharebuilder. They offer $4 trades if it is scheduled on a Tuesday. Sharebuilder provides free dividend reinvestment, fractional shares and offers historical records. Real-time trades used to cost $9.99, although this amount has decreased recently to $6.95/trade. My main problem with Sharebuilder was the fact that commissions were too high for real-time trades, and I didn’t want to be restricted to only trading on Tuesdays in order to get the low commission. Sharebuilder is ideal for someone who is just starting out dividend investing however.

Since my falling out with Zecco and Sogotrade, I have been adding new funds to Schwab. I still kept the old investments in the old brokerage accounts, but since I have new money coming it, that needs to be invested every month, I had to find a reputable broker. I like Schwab because they offer everything an investor can want, including research, a wealth of information, account records, dividend reinvestment and their customer service is very good. However, you do pay a high commission for this privilege. I do like the fact that Schwab is a publicly traded company, and that I can analyze its financials and monitor it closely. With Tradeking, Zecco and Sogotrade, I have no idea whether the companies are on the verge of bankruptcy. I also have an E*TRADE account, which provides a similar level of service as Schwab, but at slightly higher commission prices. I have mitigated the high commissions at Schwab by increasing my purchase or lot size per investment. If I bought shares in $1000 increments at Tradeking or Sogotrade, I now buy stocks in $2000 increments at Schwab.

As I discussed in an earlier article, I try not to invest more than $100,000 per brokerage, in order to add an extra layer of diversification to protect me against broker failures. While brokerage accounts are insured by SIPC up to $500,000, and most brokers also carry additional umbrella insurance, I find having multiple accounts helpful in case assets are frozen due to broker collapsing. Even if your money is SIPC insured, it could still take months before the money is recovered or available. If all of your funds are concentrated in one broker, you might be in a situation where you have a sufficient dividend income to pay your expenses, but you are unable to tap it because your broker failed.

Having many brokerage accounts is not too cumbersome. As a buy and hold dividend investor, I simply add up the total dividend income at tax time. I also try to keep certain securities such as MLPs and REITs in one specific account, in order to make it easier at tax time.

To summarize, while low commissions are important, they should not be the only factor in determining which brokerage to choose. Important factors include providing sufficient data support that would be beneficial during tax time, historical records, as well as a platform that is intuitive and easy to use. Automatic dividend reinvestment is an important feature as well, as is the ability to monitor your broker financial performance. As a result, I believe that Sharebuilder and Schwab are be the best brokers for dividend investors.

It's not that important for your post, but the Fidelity $2,500 minimum is apparently just a "suggestion" rather than a requirement. I know this because I have helped a few younger friends set up accounts where they only invested between $1,000-2,000 and were able to invest without penalty. Just an FYI

I would like to put in a massive recommendation for Scottrade. I have been a very happy customer. One advantage of Scottrade over Schwab is that dividends are usually in your account (except for foreign stocks and fractional shares) by 9pm the night prior to the payout date (example- if the payout date is the 15, the money is in your account the 14th at 9pm). This allows you to use the dividends the morning of the payout date in order to buy new stock, if a purchase is warranted. Schwab, in my understanding, has your dividends in the account the night of the payout date. I am exceedingly pleased with getting my money earlier. It is also fun because if the payout date is a Monday, I will see my funds on Friday at around 9pm. A very solid company in my experience. Thanks DGI for your continued output!J

I recently asked Scottrade about dividend reinvestment, and received an email from a rep stating that dividend reinvestment would start later this spring, but with a twist: the ability to reinvest a dividend into any stock, not just the underlying one. We will see if they come through.

Thanks for your notes on various brokerages, but we are really surprised that Vanguard Brokerage Services wasn't mentioned. We're in the process of consolidating several smaller individual and drip accounts into Vanguard and they have been wonderful to deal with and their pricing is as favorable as most mentioned here. KMS.

I have and actively use both E*Trade and Schwab accounts for some years.

I really like the E*Trade website, and its user interface. I also like its easy access to S&P, Credit Suisse and a couple other analyst reports. And their customer service also is easy to reach and usually pretty helpful.

However, one downside is E*Trade hasn't been doing that well financially for some years, and has been rumored for takeover by various parties, the last one I heard being Schwab.

For Schwab, their customer service is good. But I find their website interface more balky and less user friendly than E*Trade.

But in both cases regarding dividends, they both seem to have quite a lag between the dividend pay dates and the dividends getting credited to my accounts.

Another factor to consider is does your brokerage provide for online importing of your tax into into whatever tax package you use such as TurboTax. Schwab imports into TurboTax, and I believe E*Trade does too, although I have my tax-deferred accounts there.

One gripe I have with Schwab is I'd like to get an email notification or message everytime there's a cash deposit into my account (such as a dividend payment). But after talking to Schwab at length, they tell me their system can't do that... Why????

Just a note to consider: Many stocks, like HCN, PNY, etc., give a 5% discount on the reinvestment. Be SURE your company passes that along. It makes a huge difference over time. FIDO does that, and I have confidence that IF anything crazy were to happen, FIDO is one of the generals that wouldn't fail.

I have only included Brokerages I have personally used or am using. Unfortunately I have no experience with Vanguard and USAA or Scottrade. I expect that in a few years I would probably open an account with them, but I still have some room left to build the other accounts to the maximum contributions amounts.

By the way I did not even think about the timing of dividend payments.

Another gripe I have with Tradeking today is that they withheld too much on my Nestle dividend - 35% versus the 15% they should have withheld. Unfortunately, their office is closed on weekends, and I can only email them. Schwab is open.

Thanks for your review, I had asked if you would do such a list with your experiences based on the fact that you are only going to $100k in each account. You are probably going to need 10 of them ;)

I personally don't have any hesitation going up to $500k with any one brokerage firm so I would only need 4 or 5 companies.

I was with Zecco but merged to Tradeking, they do allow factional reinvestment. I have a sharebuilder account and if you are a Costco Member you can get $2 Tuesday investing or $6.95 anytime investing. Vanguard is another that is $7 trading and will be $2 when I hit $500,000. I also have Optionshouse, which is very bare bones, but who cares for buy and hold, it is $3.95/trade, with free reinvesting and fractional shares.

If I had to open another account I think it would be with Wells Fargo, b/c I hear they offer 25 free trades a year with a minimum of $25k.

TD Ameritrade is a good full service brokerage with $7 trades (may be higher with lower account balances) and Interactive Brokers is bare bones (quotes are 20 minutes delayed) with super low trades ($1/trade but $10/month minimum) and low margin loans (1.61% vs. 5% on Realty Income preferred).

Folio Investing offers basket trading for a flat annual fee. I have created multiple baskets of dividend paying stocks and I can trade the entire thing in one transaction with no per transaction or per share cost beyond the annual fee. It's definitely no-frills compared to some of the others on your list, but head & shoulders above the rest IMO for dividend portfolio investments.

As a new investor, can someone tell me what happens to my shares that are held by one of the above companies if they go under (think lehman and Bear)? Is there some kind of fiduciary that recovers them for investors? thanks...

FolioFn.com is worthy of serious consideration. I have used them for 7-8 years and found for the flat fee of $290 per year you get a lot of value for the money; also, very turbo tax friendly! They have developed many "folios" that are rebalanced periodically - check them out.

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